On Nov. 17, FSB addressed issues from Covid March market turmoil.
FSB issued work programme to address risks from non-bank financial intermediation.
Published chair's letter and two reports to G20 leaders ahead of Nov. 2020 summit.
On same day, FSB issued report on policy actions taken to address Covid see, #90934.
Follows Fed Oct. 2020 Quarles on non-bank financial institution risks, see #88837.
Chair Letter on Reform Status
Letter stated FSB acted to address vulnerabilities in financial system exposed by Covid.
Has made progress on other topics, from cross-border payments to reforms of LIBOR.
Will require continued strong commitment and coordination at the international level.
Noted financial conditions has eased, but global economic outlook remained uncertain.
Financial stability risks raised, set out 3 responses to financial stability vulnerabilities.
Market Turmoil in Mar. 2020
Letter said market turmoil in Mar. 2020, manifested itself differently around the world.
Emerging market economies experienced severe strains in offshore US dollar funding.
Some advanced economies saw significant outflow from government bond investment.
FSB holistic review assessed initial stages of the Covid-19 event, as having exposed a number of common strengths and vulnerabilities across the global financial system.
Need Enhanced Vigilance
Covid shock revealed need for continued vigilance, and policy support to the markets.
Challenge posed by Covid not yet dissipated, remains persistent economic uncertainty.
Elevated stability risks call for continued vigilance, FSB is monitoring for vulnerabilities.
Protracted nature requires continued efforts to support resilience and ensure financing.
Covid crisis provided an opportunity to further assess financial stability risks, and to refine measures put in place after the 2008 global financial crisis, where appropriate.
Lessons help strengthen financial sector resilience to better prepare for future shocks.
Conducted Holistic Review
FSB issued review to analyze market upheaval in Mar. 2020, brought about by Covid.
Assessed market reaction to Covid and FSB work on risks of non-bank intermediation.
Breadth and dynamics of economic shock, related liquidity stress in Mar. 2020, were unprecedented, caused fundamental repricing of risk, raised demand for safe assets.
Stress also led to large, persistent imbalances in demand for, and supply of, liquidity.
Cause of Liquidity Stress
Certain activities, mechanisms in financial system acted as mitigants of liquidity stress.
Central counterparties were resilient despite market turbulence, some investors in open-ended investment funds may have faced incentives to redeem, ahead of others.
Stronger bank capital and liquidity positions, that were built over the past decade, as a result of the post-crisis reforms, helped to prevent a sharper rise in counterparty risks.
Some banks unwilling or unable to deploy balance sheet capacity, in uncertain market.
Dealers faced difficulties absorbing large sales of assets in short-term funding markets.
Market dysfunction were exacerbated by substantial sales of US Treasuries, by some leveraged non-bank investors and foreign holders, but stated it is highly likely stress in financial system would have worsened significantly absent central bank intervention.
Action on Non-Banks
FSB concluded Mar. 2020 turmoil underscored need to strengthen non-bank financial intermediation (NBFI) resilience, set out NBFI work programme, focused on 3 areas.
Enhance understanding of systemic risks in NBFI and the financial system as a whole, including interactions between banks and non-banks, and spill-overs across-borders.
Also need to assess policies that can better address the systemic risks in NBFI sector.
Review adequacy of policy tools and the concept and desired level of resilience in NBFI.
Non-Bank Work Program
Issued work program on NBFI, coordinated and overseen by FSB for 2021 and beyond.
Policy proposals to enhance money market fund (MMF) resilience in 2021, report G-20.
Examine liquidity risk in open-ended funds (OEFs), redemption pressures, in 2021-22.
Review margining process in centrally cleared and uncleared derivatives markets, and liquidity management preparedness of market participants to meet margin calls, 2021.
Liquidity, structure and resilience of core bond market, examine working under stress, role of leveraged investor and factors limiting dealer ability to intermediate, in 2021-2.
Analyze interconnectedness in NBFI, USD funding pressures and fund outflows, 2021.
Examine policies to address systemic risks in NBFI, adequacy of current tools, in 2022.
Report to G-20 on Covid and Policy
FSB issued report updating G20 leaders on impact of Covid-19 on the financial system.
Considered the financial stability impact, and policy responses to the Covid-19 event.
Stated global financial conditions continued to ease since G20 meeting in Jul. 2020.
Attributed to decisive policy action earlier this year, but risks to global financial stability remain elevated, financial conditions vulnerable to sharp shifts in investor sentiment.
Noted that volatility in equity prices has increased recently against the backdrop of a second wave of the pandemic and further containment measures in some regions.
Deteriorating credit quality of non-financial borrowers poses risks to financial sector.
Pandemic intensification, resulting necessary government containment measures, and greater uncertainty about its duration, increased vulnerabilities in non-financial sector.
Impact on Banks
Vulnerabilities may increasingly affect banks, and supply of financing to real economy.
Bank capital ratios have held up so far, and have allowed banks to continue lending.
But rising loan losses and worse asset quality, may see banks tighten credit conditions.
In addition, further credit ratings downgrades, could put bond markets under pressure.
Risk that a deterioration in corporate sector health, could lead to further downgrades.
Evolving Covid-19 pandemic, associated economic uncertainties need continued efforts to support financial resilience, ensure sustained flow of financing to the real economy.
It is critical to address potential obstacles to the use of bank capital and liquidity buffers to absorb losses and support lending, while avoiding harmful deleveraging.
Use of analytical tools, such as stress testing, is important to inform assessment of potential solvency risks on financial stability and adjustments in policy responses.
Authorities’ communication of expectations of future policy, at a time when conditions are changing fast and the outlook is uncertain, is important to support confidence.
On Nov. 17, 2020, GE BaFin noted FSB's workplan focus on specific risks that may have exacerbated the shock, on understanding risk in NBFI sector, including links between banks, non-banks, and measures to reduce systemic risks in the NBFI sector.